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July 22, 2014

The Price of Compliance
3 min read

As part of the Securities Exchange Act of 1934, SEC Rule 17a-3 governs record-keeping in relation to broker dealer trade communications. In this modern age of information both the velocity and complexity of these communications have increased exponentially, and many financial firms have found themselves struggling to find usable solutions for compliance with Rule 17a-3.

Following the events of September 11th, 2001 SEC Rule 17a-3 suddenly and dramatically became a growing concern for an increasing number of financial clients. When the World Trade Centers collapsed, they took with them a massive volume of financial records (both printed paper and electronically stored). What had formerly been the realm of back office auditors and regulators, came to the forefront of conversations within the executive suite. For some small and mid-level firms the operational devastation became too big of a hurdle to overcome, and those firms found themselves in the unfortunate position of being unable to re-establish trading operations. Meanwhile, larger firms with bigger war chests set about the arduous task of establishing a decentralized datacenter storage facility as a key component of a larger business continuity and disaster recovery plan.

However, the task of record-keeping is not always as easy as simply gathering trade tickets to be stored at the datacenter. As trading technology has advanced, so has the complexity of the trading records. Gone are the days of face-to-face transactions and handwritten tickets. These days the full history of a trade is likely to be spread across a variety of formats that could include electronic messenger, email and/or telephonic communication. Aggregating all of these different formats into one cohesive file, can be quite a daunting task.

Furthermore, the task becomes even more complicated for firms that trade more exotic investments. Investments such as complicated derivatives and CDOs are notoriously hard to price. The smaller the market and/or demand for an investment, the more complicated it is to price, which can cause pricing models to lack consistency. As a result, backend record-keeping and IT applications can become flawed. Large-scale examples of these inconsistencies are evidenced in the methodology flaws that were uncovered by the debt rating agencies Moody’s and S&P. Recalibrating the flaws in line with updated methodology caused dramatic shifts in pricing for the impacted securities.

As an added complication, financial firms are also responsible for finding a way to securely migrate this massive amount of information from the main headquarters of operation to the datacenter without any breach of private client information. Once the data is securely migrated, the files must be converted to a WORM file in order to prevent tampering.

For these reasons alone it is no surprise that many smaller firms are opting to outsource the record-keeping aspect of operations. Business continuity and regulatory practices demand a solid record-keeping plan, but the cost to maintain such a plan often becomes too much to sustain in house.

As financial markets continue to innovate and advance, there are a small population of vendors who make it their sole purpose to address the growing demands of regulatory systems and to provide assurance to those concerned about the degree of which their operations are complying.

Being one of the those aforementioned vendors who utilize technology to complete and maintain full compliance to rule 17a-3 and all of the SEC stipulations and statutes, Loffa Interactive Group is committed to providing the peace of mind that Broker/Dealers want without the convoluted ways of out-sourced back office operations.